Lennar Reports Third-Quarter Profit as Margins Widen

Lennar Corp. reported a better- than-estimated third-quarter profit as margins on house sales improved and revenue grew at its distressed-investing division. The stock climbed the most in four months.

Profit for the three months ended Aug. 31 was $30 million, or 16 cents a share, compared with a loss of $171.6 million, or 97 cents, a year earlier, the Miami-based homebuilder said in a statement today. The average estimate from a Bloomberg survey of 16 analysts was for a profit of about 3 cents a share.

Lennar is cutting costs and expanding its distressed- investing unit as demand for houses slumps after the April expiration of a tax credit for homebuyers. The company’s orders fell 15 percent in the third quarter, a smaller decline than estimated by analysts at JPMorgan Chase & Co., KeyBanc Capital Markets Inc., Citigroup Inc. and Ticonderoga Securities LLC.

“Given the weak housing market post tax credit, we believe this is a respectable result,” Stephen East, an analyst with Ticonderoga Securities in New York, wrote in a note to clients. He had predicted Lennar’s orders would fall 27 percent.

Lennar gained 8.2 percent, the biggest gain since May 10, to $15.14 at 4:03 p.m. in New York Stock Exchange Composite trading. The stock has climbed 19 percent this year, the biggest increase in the 12-member Standard & Poor’s Supercomposite Homebuilding Index.

Revenue Rise

The company’s third-quarter revenue climbed 14 percent to $825 million. Home completions rose 10 percent to 2,950. Orders fell to 2,624 homes from 3,104 a year earlier.

U.S. new home sales dropped in July to the lowest rate since Commerce Department records began in 1963. Sales for August, to be released Sept. 24, will be at a pace of 295,000, the third-lowest on record, according to a Bloomberg survey of 50 economists.

Traffic from prospective homebuyers has begun to improve, Lennar President and Chief Executive Officer Stuart Miller said during a conference call with analysts and investors.

“The slowest month of the third quarter was June, and July and August were a little less horrible,” he said. “As we’ve gone into September, we’re seeing a little bit of pickup in our traffic, but that shouldn’t be a cause to have a sigh of relief.”

Margin Gains

Operating margins on home sales, a measure of profitability, increased by about 1.5 percentage points in the third quarter to 7.2 percent, the company said.

Margins may decline in the fourth quarter as Lennar increases incentives for homebuyers by as much as $5,000, Miller said on the conference call. Incentives in the previous three months averaged $30,600, he said.

Lennar’s Rialto Investments division, which focuses on managing and restructuring distressed real estate, contributed $7.7 million in operating profit during the period, Miller said. Rialto’s role expanded after February, when Lennar bought a 40 percent stake in a $3 billion portfolio of loans auctioned by the Federal Deposit Insurance Corp.

About 1,500 of 3,300 new lots acquired during the quarter came through Rialto, Miller said on the call.

“About half of our opportunities came through the back door as part of Rialto,” he said. “There are outsized returns in distressed vehicles.”

Bidding competition for distressed properties has declined recently, Miller said. Opportunities for distressed investing will probably end in less than two and a half years, he said.

“It’ll be shorter than people anticipate,” Miller said.

The earnings show Lennar “should lead its peers in EPS and operating margins over the next 12 to 18 months,” Michael Rehaut, a homebuilding analyst with JPMorgan, wrote in a note to investors. “The sector continues to discount an overly negative outlook regarding home price deflation and impairment charges.”

Lennar reported a profit in two of the three previous quarters, ending almost three years of losses. The company benefited from demand from homebuyers seeking to take advantage of the government incentive, as well as a tax refund in the quarter ended Nov. 30.

To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net.

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